THE PHILIPPINES IN THE AUTOMOTIVE GLOBAL VALUE CHAIN
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The Philippines
i n t h e Au t o m o t i v e
G l o b a l Va l u e C h a i n
m ay 2 0 1 6The Philippines in the Automotive Global Value Chain This research was prepared by the Duke University Center on Globalization, Governance & Competitiveness (Duke CGGC) on behalf of the USAID/Philippines, through the Science, Technology, Research and Innovation for Development (STRIDE) Program as part of the Philippines Department of Trade and Industry (DTI) Board of Investment (BOI) Roadmap Initiative for the development of the manufacturing industry in the Philippines. The report is based on both primary and secondary information sources. In addition to interviews with firms operating in the sector and supporting institutions, the report draws on secondary research and information sources. The project report is available at www.cggc.duke.edu. Acknowledgements Duke CGGC would like to thank all of the interviewees, who gave generously of their time and expertise, as well as Richard Umali of the USAID Advancing Philippine Competitiveness (COMPETE) Project for his extensive support and feedback on earlier drafts. The Duke University Center on Globalization, Governance & Competitiveness (Duke CGGC) undertakes client-sponsored research that addresses economic and social development issues for governments, foundations and international organizations. We do this principally by utilizing the Global Value Chains (GVC) framework, created by Founding Director Gary Gereffi, and supplemented by other analytical tools. As a university-based research center, we address clients’ real-world questions with transparency and rigor. www.cggc.duke.edu Center on Globalization, Governance & Competitiveness, Duke University © May 2016
The Philippines in the Automotive Global Value Chain FINAL DRAFT FOR REVIEW May 2016 Prepared by Timothy Sturgeon, Jack Daly, Stacey Frederick, Penny Bamber and Gary Gereffi Center on Globalization, Governance & Competitiveness, Duke University Prepared for USAID/Philippines This study is made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of Duke University Center on Globalization, Governance and Competitiveness and do not necessarily reflect the views of USAID or the United States Government.
The Philippines in the Automotive Global Value Chain
Table of Contents
Executive Summary .......................................................................................................................................... iv
1. Introduction ...............................................................................................................................................1
2. The Global Automotive Industry ..........................................................................................................2
2.1. Mapping the Automotive Global Value Chain ...................................................................................4
2.2. Global Supply and Demand in the Automotive GVC ......................................................................7
2.3. Firms and Governance Structures in the Automotive GVC ..........................................................9
2.4. Upgrading in the Automotive GVC .................................................................................................. 12
3. Lessons for Upgrading from Vietnam and Thailand ....................................................................... 16
3.1. Vietnam ............................................................................................................................................. 17
3.2. Thailand ............................................................................................................................................. 18
4. The Philippines and the Automotive Global Value Chain ............................................................ 23
4.1. The Development of the Auto Industry in the Philippines .......................................................... 24
4.1.1. Investment Regimes ..................................................................................................................... 25
4.1.2. Key Firms ....................................................................................................................................... 26
4.2. Current Participation in the Automotive GVCs ............................................................................ 28
4.3. Evidence of Industry Upgrading ......................................................................................................... 32
4.4. The Philippine Automotive Workforce ........................................................................................... 36
4.5.1. Advantages ..................................................................................................................................... 38
4.5.2. Challenges ...................................................................................................................................... 39
4.6. Potential Upgrading Trajectories ....................................................................................................... 41
5. References ............................................................................................................................................... 44
6. Appendix .................................................................................................................................................. 48
Tables
Table E-1. Possible Upgrading Trajectories in Automotive GVC ....................................................... viii
Table 1. Global Automotive Exports by Value Chain Stage and Subsector ....................................... 8
Table 2. Global Leaders in Motor Vehicle Production, 2013-2014 ...................................................... 9
Table 3. Motor Vehicle Companies that Eclipsed 1 Million Unit Threshold, 2014 ......................... 10
Table 4. Top 15 Global Suppliers in 2014 by Sales................................................................................. 11
Table 5. Possible Industrial Policy Strategies for Upgrading in the Automotive GVC ................... 13
Table 6. Top 10 World Exporters of Wire Harnesses in 2014, 2007-2014 .................................... 15
Table 7. Philippine Automotive Exports by Value Chain Segment, 2007-2014 ............................... 23
Table 8. Investment Regimes for the Philippines Automotive Industry, 1916-2015 ....................... 25
Table 9. Major Auto Parts Companies in the Philippines ..................................................................... 28
Table 10. Philippine Top 10 Automotive Exports in 2014 by Value, 2007-2014 ............................ 30
Table 11. Wire Harness Companies in the Philippines by Year Established .................................... 31
Table 12. PEZA Investments by Firms Serving Automotive Value Chain, 1978-2015 ................... 34
Table 13. Functional Upgrades into Automotive R&D in the Philippines ......................................... 35
Table 14. The Philippines in the Automotive GVC 'SWOT' Analysis ................................................ 37
Table 15. Sales of Motor Vehicles in ASEAN Countries by Year, 2011-2015 ................................. 40
Table 16. Public and Private R&D Spending as Percentage of GDP, 2004-2013 ............................. 41
Table 17. Top 10 Imports, by Value, of Philippines Wire Harness Exporters, 2014...................... 42
Table A-1. CKD vs. CBU Sales in the Philippines, 1990-2011 ............................................................. 48
Table A-2. Auto Companies Located in PEZAs by Segment, Date of Investment.......................... 48
iThe Philippines in the Automotive Global Value Chain
Table A-3. Philippine Top 10 Export Destinations for Wire Harnesses by Value .......................... 48
Table A-4. Upgrading in Laguna Technopark ........................................................................................... 49
Table A-5. Supporting Automotive-Specific Stakeholders by Focus Area ........................................ 49
Table A-6. Motor Vehicle HS Codes ......................................................................................................... 50
Table A-7. Top 10 Exporters of Wire Harnesses (HS Code 854430) in 2014 ............................... 52
Figures
Figure E-1. Philippine Participation in the Automotive GVC ................................................................. vi
Figure 1. The Automotive Global Value Chain ......................................................................................... 4
Figure 2. Philippine Participation in the Automotive GVC ................................................................... 29
Boxes
Box 1. E-Vehicles Could Lead to Transformative Change .................................................................. 14
Box 2. Wire Harnesses, an Evolving Niche for Developing Countries ............................................. 15
Box 3. Upgrading within the Automotive GVC in Laguna Technopark ............................................ 36
iiThe Philippines in the Automotive Global Value Chain
Acronyms
ADB Asian Development Bank
ASEAN Association of Southeast Asian Nations
BOI Board of Investments
BPO Business Process Outsourcing
CAMPI Chamber of Automotive Manufacturers of the Philippines Inc.
CARS Comprehensive Automotive Resurgence Strategy
CBU Completely Built Up
CDP Car Development Program
CESDR Center for Engineering and Sustainable Development Research
CKD Complete Knock Down
CUICAR Clemson University International Center for Automotive Research
DTI Department of Trade and Industry
EVI Electric Vehicles Initiative
FAIP Federation of Automotive Industries of the Philippines
FDI Foreign Direct Investment
GVC Global Value Chains
HEDP Higher Education Development Project
IE Industrial Estates
JV Joint Venture
LCR Local content requirements
MNC Multi-national corporation
MVDP Motor Vehicle Development Program
OE Original Equipment
OICA Organisation Internationale des Constructeurs d'Automobiles
PCMP The Progressive Car Manufacturing Program
PEZA Philippine Economic Zone Authority
PROCEI Mexico-European Union Competitiveness and Innovation Program
PPMA Philippine Parts Makers Association
PSIC Philippine Standard Industrial Classification
R&D Research and Development
SME Small-Medium Sized Enterprise
TAI Thailand Automotive Institute
TAMPA Thai Auto-Parts Manufacturers Association
TAP Toyota Auto Parts
UIL University–industry linkages
WTO World Trade Organization
iiiThe Philippines in the Automotive Global Value Chain
Executive Summary
This report uses the Duke CGGC Global Value Chain (GVC) framework to examine the role
of the Philippines in the global automotive industry and identify opportunities for upgrading. The
country’s strength in the sector is in electrical and electronic automotive components, with
approximately two-thirds of its US$3.98 billion exports in 2014 falling in one of these
categories. The Philippines has a particularly strong foothold in wire harnesses, exports of
which increased by 129% from 2007 to 2014 to allow it to become the world’s fourth largest
global exporter. The prominence of the cluster affords the country a number of upgrading
opportunities moving forward. Otherwise, the relatively small size of the domestic market has
constrained the development of the industry, with local companies unable to generate the
economies of scale necessary to compete in an increasingly consolidated global environment.
The Automotive Global Value Chain
The global automotive industry is one of the world’s largest manufacturing sectors, and
worldwide trade of final products and components accounted for roughly US$1.4 trillion in
exports in 2014. Its organization is complex and in the midst of a profound transition. Since the
1990s, it has been shifting from a series of fairly discrete national industries, connected to the
outside world mainly through exports and the local assembly operations of multinational firms,
to a more integrated global industry in which value is added in multiple countries before
finished vehicles are sold, and locations are more likely to specialize in specific sets of activities.
• Motor vehicles tend to be designed, engineered, and tested in the industry’s
traditional design clusters in developed countries such as Detroit, Stuttgart, and
Tokyo. The largest automakers have concentrated vehicle development in a few centers to
distribute the high cost of vehicle design and engineering across products sold in multiple
end markets.
• Production tends to be organized regionally or nationally in large countries,
with bulky and model-specific parts-production concentrated close to final
assembly plants. Because many automotive parts tend to be heavy and efforts to reduce
inventory have driven firms to employ just-in-time delivery to reduce costs, there are limits
on how far apart parts production and final assembly can be. As a result, regional parts
production tends to feed final assembly plants, which concentrate on national or regional
markets. Because of deep investments in capital equipment and skills, local automotive
clusters tend to be very long-lived once established.
• Lighter, more generic parts are produced at a distance to take advantage of
scale economies and low labor costs. When product variety is high, parts for complex
sub-assemblies are shipped from distant low-cost production locations to sub-assembly
facilities adjacent to final assembly plants, where they can be tailored to the exact
requirements of vehicles under assembly.
• The automotive industry is in the midst of a profound transition from a
technological point of view. The relationship between global automakers and technology
companies is improving, and with the increasing amount of electronics components in
ivThe Philippines in the Automotive Global Value Chain
motor vehicles, deeper partnerships can be expected in the future. Moreover, the spread of
electric vehicles could offer a wealth of new opportunities. Roughly 665,000 e-vehicles are
already in use around the world, and millions more are expected to be purchased in the
years ahead in emerging markets such as India and China.
The Philippines in the Automotive GVC
The Philippines automotive manufacturing capabilities are mostly oriented towards the
domestic market rather than regional or global chains. The lead firms active in the Philippines—
Toyota, Mitsubishi, Mazda, Nissan, and Isuzu—are Japanese automakers that generate vehicles
for the domestic market. Most have had a presence in the country for decade, although there
has been frequent turbulence, with the 2012 closing of the Ford assembly plant in Laguna being
the most recent example. The shuttering of the Ford site continued the trend of decreasing
assembly of Complete Knock Down (CKD) units in the country—sales of CKD kits fell to
67,742 in 2011 from an 1996 apex of 137,365.
The erosion of the CKD base has, in turn, impaired the development of domestic suppliers;
without requisite demand, lead firms have difficulty finding suppliers that have the ability to
produce parts in sufficient volume. This has led to an overall stagnation that can be detected by
analyzing the total number of domestic parts producers. In 1996, there were 240 companies
manufacturing car parts and components, both producers of “Original Equipment” parts (OE)
and producers of replacement parts; in 2014, that number was 256.
While there are at least 123 companies situated in the export processing zones, only a small
handful of these firms export goods in high volume, with the 15 largest accounting for 80% of
total revenue. Together, these companies helped the Philippines’ increase its automotive
exports by roughly 33% from 2007 to 2014 to nearly US$4 billion. Although that figure is only a
small fraction of global automotive exports, it represented 6.4% of the Philippines’ total goods
exports in 2014.
Six of the largest 10 exporters are wire harness companies. Wire harnesses direct the flow of
current and electronic signals throughout the vehicle. The sub-system is of growing importance
as the electronics content of vehicles increases—global exports increased by 53% from 2007 to
2014. Because assembly is labor intensive, it is a promising niche for developing countries,
which can use their cost advantages to attract foreign investment. The Philippines has exploited
its competitively priced labor to increase its market share in the industry; its share of
worldwide exports increased from 4.2% in 2007 to 6.3% in 2014.
Beyond wire harnesses, the second largest export category is a broad one that captures wheel
and tire assemblies, drive trains, and vibration controls. However, growth in this segment has
been stagnant in recent years—there were 44 different companies that exported US$862
million in 2007 but only 30 firms with exports of US$674 million in 2014. The third largest
export category—gear boxes or transmissions—has been demonstrating more consistent
growth, although there are only four companies active. Figure E-1 summarizes with an
illustration of the Philippines’ participation in the automotive GVC. Grey shading indicates the
degree of Philippines participation in this segment.
vThe Philippines in the Automotive Global Value Chain
Figure E-1. The Philippines’ Participation in the Automotive GVC
Source: Duke CGGC.
These and other features translate to a number of advantages for the government as it attempts
to facilitate upgrading in its automotive sector. These include:
• Well-established global footprint in wire harnesses. There are at least 15 wire
harness firms active in the country, and two of the industry’s leaders—Yazaki and
Sumitomo—have long-standing investments, with major suppliers such as Lear and
Furukawa also expanding to the Philippines in more recent years. All four companies have
undergone a range of upgrades, cumulatively expanding or implementing new projects 25
times.
• Commitment of leading industry stakeholders. The lead firms active in the
Philippines have displayed a strong commitment to the local market, giving vitality to a
number of industry associations. Together, these organizations have collaborated on efforts
such as formulating the industry road map while also playing important roles in shaping
policy initiatives such as the Comprehensive Automotive Resurgence Strategy (CARS),
which provides a regulatory framework that attempts to encourage the development of the
domestic supply base. The strong commitment of industry stakeholders is mirrored by a
supportive and collaborative environment for industry policy development in manufacturing
sectors, which has been assisted through programs put in place by the Department of Trade
and Industry and the Board of Investments.
viThe Philippines in the Automotive Global Value Chain
• Competitive labor environment. The country’s human capital advantages include
relatively low wage rates, a deep pool of engineers, widespread English skills, and low
attrition rates.
• Effective Export Processing Zone (EPZ) regime. There are large concentrations of
firms in the EPZs in the Laguna and Cavite regions. The EPZ regime provides a range of
specific benefits, including tax incentives, assistance with visas, and streamlined import and
export procedures.
• CARS’ provision of incentives to lead firms. The CARS program is an innovative
attempt to generate economies of scale in the domestic market by offering US$600 million
in incentives to a limited number of lead firms. By restricting the program output-based
assistance to a maximum of three models, it hopes that local parts makers will be able to
generate economies of scale from only having to produce components for a small number
of products.
In order to capitalize on these strengths, there are constraints that can be addressed to
facilitate industry upgrading. These challenges include:
• Gaps in supply chain. Only 330 of the 20,000-30,000 total vehicle parts are produced in
the Philippines (DTI, 2014). The gaps span all levels of the supply chain—lead firms listed
body shells and stamping plants, engines, air conditioning units and suspension systems, wire
harness manufacturers import electrical switches, terminals, and specialized parts from both
the region and Europe and North America, and transmission producers rely on India for
polished metal and China for forged parts.
• Comparatively small market for new motor vehicles. While annual motor vehicle
sales in the Philippines have been on a strong upward trajectory, the country still ranks well
below regional peers such as Indonesia, Malaysia, and Thailand. Even if the market meets the
projections of 500,000 annual sales of motor vehicles by 2020, demand will still likely be
lower than Indonesia, Malaysia, and Thailand, making the country an unlikely candidate for
investments by global lead firms. Without further expansion in assembly capabilities, there is
risk there will not be sufficient demand for suppliers to increase their capacity.
• Low to moderate support for R&D activities. Automotive companies such as
Furukawa, Denso, and F-Tech R&D have made recent investments in EPZs for knowledge-
intensive business functions. However, government support for R&D activities trails regional
peers such as Malaysia and Thailand.
viiThe Philippines in the Automotive Global Value Chain
Both the strengths and the weaknesses shape the upgrading trajectories that are available for
the Philippines. Generally speaking, the Philippines has opportunities with smaller, lighter
products that do not incur excessive transport costs but that nonetheless require technical
knowledge and cost-competitive labor to assemble. The country’s demonstrated strength in the
wire harnesses and electrical wiring could serve as a springboard for higher-value activities.
Table E-1. Possible Upgrading Trajectories in Automotive GVC
Potential Capacities
Time
Upgrading Key Benefits Required of Philippines Challenges
Frame
Trajectory Individual Firms
Short- Product & • Position the Philippines as • Human capital • Underdeveloped backward linkages
Medium Process the global automotive E&E • Access to inputs for some inputs
Term Upgrading to hub • R&D capabilities to • Logistics & transportation
Increase Wire • Leverages capabilities in adapt to increasing infrastructure
Harness Exports the sector and economies complexity • Temporary decline in labor
of scale availability due to changes in
• Labor-intensive education system
employment generator for
semi-skilled workers
Medium Functional • Position the Philippines as • Human capital • R&D still being done in traditional
Term Upgrading into the global automotive E&E • Technology manufacturing bases
R&D for Wire hub • Access to • Little clustering of automotive lead
Harnesses • Potential to generate customers firms outside wire harnesses
higher unit value products
• Higher skilled employment
Medium Chain Upgrading • Position the Philippines as • Certifications • No established reputation in the
Term into Aerospace the global producer of • Technical aerospace industry
Wire Harnesses aerospace electrical knowledge • No experience in regulated
(Electrical Wiring systems • Access to aerospace wire harness
Interconnection • Leverage expertise for customers manufacturing
Systems) higher value products
• Employment generation
for semi-skilled and skilled
workers
Medium Product & • Leverages country’s • Human capital • No established reputation in the
Term Functional capabilities in electronics • Technical automotive industry
Upgrading into • Higher unit value exports knowledge • Logistics
Automotive • Continuation of success in • Access to finance • Lack of specialized human capital
Electronics segment where Philippines • Access to • Limited R&D commercialization
is competitive customers experience
Medium- Chain entry into • Position the Philippines to • Human capital • Lack of specialized human capital
Long batteries for earn foothold in nascent • Access to • No major foreign investments in
Term e-Vehicles industry technology technology
• Potential spillovers of • Access to inputs • Possible underdeveloped backward
technology and skills into • Access to linkages
wire harness and customers
electronics segments
• Possible for both semi-
skilled and high-skilled
employment
Source: Duke CGGC.
viiiThe Philippines in the Automotive Global Value Chain
1. Introduction
The automotive industry has an iconic image in many countries around the world, with the
sector often serving as a focus for policymakers as they attempt to generate economic
opportunities for domestic constituents. The Philippines fits this template, with the government
implementing a number of strategies to boost the sector over the last 50 years. The
Comprehensive Automotive Resurgence Strategy (CARS) program, implemented in 2015, is the
most recent effort to increase the domestic assembly of motor vehicles and create a robust
supply base in the country.
As the Philippines embarks on CARS, there are industry headwinds that will limit the upgrading
trajectories that are available. At a time when automakers still tend to build where they sell, the
Philippines’ demand for motor vehicles is one of the lowest in the region, with the country’s
sales figures trailing peers such as Indonesia, Thailand, and Malaysia. While the demand dynamic
is evolving to a degree, with the Philippines posting the largest growth in sales of motor vehicles
in ASEAN from 2011-2015 (AAF, 2011-15), there is question whether future growth is likely to
include high enough demand to attract widespread investment across multiple stages of the
automotive Global Value Chain (GVC). Without the requisite demand, the country’s supply
chain may continue to struggle to generate the economies of scale necessary to compete in an
increasingly consolidated global environment.1
While there are entrenched challenges, these should not obscure the opportunities that do
exist. International trade in the industry is increasingly focused on supplying parts and
components rather than final vehicles. While the Philippines’ overall automotive exports are
small—roughly 0.3% of the US$1.4 trillion in worldwide trade—the country has carved out a
niche in specific growth segments of the chain such as wire harnesses.2 With rising electronic
functionality in all vehicle types, opportunities abound in electronic components and wiring
systems. In order to fully take advantage of this strength, the Philippines can build its Research
& Development (R&D) capabilities while also exploring spillovers related to the country’s
presence in related sectors such as electronics and aerospace. Moreover, if the country
increases its skills in these areas, it may be positioned to take advantage of the possible industry
shift to fully electric vehicles, especially since minimum scale economies for these vehicles are
not well established.
This report uses the GVC framework to analyze the Philippines’ current position and potential
for upgrading in the automotive value chain. GVC analysis examines the full range of activities
that firms and workers around the world perform to bring a product from conception through
production and end use. As part of this analysis, multiple factors are considered; trade patterns,
end markets, product characteristics, technology-intensity, labor, standards, and regulations,
among others. This information is analyzed from a global perspective and from the viewpoint of
1
CARS offers a strategic approach in its attempt to change this dynamic—by limiting the program to a maximum
of three participants and three total models, it hopes to generate sufficient scale for domestic businesses that have
historically been constrained by limited demand.
2
The Philippines was the fourth-largest global exporter of wire harnesses in 2014, and exports have increased
129% from 2007 to 2014.
1The Philippines in the Automotive Global Value Chain
the Philippines in order to provide a holistic picture of the situation when identifying
trajectories for entry, growth, and upgrading along that chain. Its recommendations work
toward two goals—boosting the country’s exports, and increasing the capabilities of producers
that are focused on the domestic market.
This report is structured as follows: First, it analyzes the global industry, including an extended
discussion on the key segments of the chain and how important stakeholders in the chain
interact as well as the evolution of critical trends at the global, regional, and national levels. It
then offers case studies of two countries—Vietnam and Thailand—to illustrate both effective
and ineffective policy regimes for building a domestic supply base. The report continues by
analyzing the Philippines presence in the industry before concluding with potential upgrading
trajectories for the country as well as recommendations to assist these efforts.
2. The Global Automotive Industry
The global automotive industry is one of the world’s largest manufacturing sectors. More than
90 million vehicles were produced in 2014, and the value of finished passenger vehicle exports
totaled US$688 billion. The largest market segment is passenger vehicles (nearly 80% of the
world market), followed by light and heavy commercial and industrial vehicles for on- and off-
road use (about 20%), and finally buses (less than 1%).3 Motorcycles (including motorbikes,
scooters, and three-wheelers) comprise a separate industry (with a mostly distinct set of lead
firms and suppliers), but are to some degree substitutes for automobiles. Motor vehicles are
highly complex machines, but from the perspectives of technology, assembly, and supply chain,
both commercial vehicles and motorcycles tend to be much simpler than passenger vehicles.
The automotive industry is in the midst of a profound transition, from geographic,
organizational, and technological points of view.4 Since the 1990s, it has been shifting from a
series of fairly discrete national industries, connected to the outside world mainly through
exports and the local assembly operations of multinational firms, to a more integrated global
industry in which value is added in multiple countries before finished vehicles are sold, and
locations are more likely to specialize in specific sets of activities.5 Today, motor vehicles tend
3
Passenger vehicles generally include automobiles (including taxis), sport-utility vehicles, and light-duty pick-up
trucks.
4
The move toward electric vehicles is one of the more profound technological changes under way in the industry.
Global demand for electric vehicles has accelerated in recent years, posting annual gains of more than 100% in
2011 and 2012 and then increases of between 50-75% in 2013 and 2014. In April 2016, Tesla then announced pre-
orders for its Tesla 3 Model had exceeded its forecasts and that it would have to adjust its production plans
(Voelcker, 2016).
5
One early, highly structured example are the “complementarity schemes” undertaken by major Japanese
producers such as Toyota in ASEAN beginning in the late 1980s. Under this arrangement, small market countries
received investment for the manufacturing of specific major subsystems and processes, such as transmissions in the
Philippines, engines in Indonesia, electronics in Malaysia, and bodies and final assembly in Thailand. With the
enlargement of ASEAN and the growing importance of tight, “just-in-time” supply linkages to final assembly, this
system has faded as Thailand has become the dominant producer in the region, specializing in pick-up trucks and a
multitude of parts and subsystems. However, investments in major vehicle subsystems such as transmissions and
2The Philippines in the Automotive Global Value Chain
to be designed, engineered, and tested in the industry’s traditional design clusters such as
Detroit, Stuttgart, and Tokyo, and then produced regionally or even globally. GVCs of this sort
increase the complexity and variability of production systems, and open up new pathways for
development through value chain fragmentation and investment in new locations.
However, effectively taking advantage of these opportunities remains a challenge, and there are
a number of factors that work against the geographic fragmentation of the industry. These
include the following:
• Political pressure: As highly visible and perhaps iconic goods, there is strong political
regulatory pressure to produce automobiles in markets where they are sold, especially
in large countries such as China and the US.
• Just-in-time production: Because many automotive parts tend to be heavy and bulky,
and efforts to reduce in-process inventory has driven firms to employ “just-in-time”
delivery to reduce costs and increase quality, there are limits on how far apart parts
production and final production can be.
• Economies of scale: Unlike labor intensive industries, motor vehicles have high
minimum scale economies in production, especially for key components such as engines
and transmissions and key steps in the assembly process, such as large metal stamping,
body welding, body undercoating and paint.
• Consolidation in the supply base: As in the commercial aircraft and other complex
manufacturing sectors, consolidation in the automotive supply base has increased the
size and scope of Tier I suppliers, and this has also worked to narrow opportunities for
local actors in the second and third tiers of the chain.
These obstacles ensure that even with manufacturing moving closer to end markets, geographic
separation of design from production can isolate firms in emerging economies from the higher-
value, strategic and innovation-related segments of the chain. As a result, developing countries,
even those with high volume production, can become confined to overly narrow, low-value
added segments of the chain. When this happens, countries can remain insulated from
innovation and product development for long periods of time, causing industrial upgrading and
technological learning processes to stall.
This section proceeds by outlining the GVC for the automotive industry. It then discusses the
geographic distribution of supply and demand before examining the lead firms in the sector and
the manner in which they control the chain. After outlining recent changes in chain governance,
the global section concludes by offering examples of potential upgrading trajectories for
developing countries before offering a brief introduction to the wire harness segment.
engines require extensive machining, are capital intensive, and thus tend to be long-lived. The existence of several
export-oriented transmission plants in the Philippines reflects this.
3The Philippines in the Automotive Global Value Chain
2.1. Mapping the Automotive Global Value Chain
The principal stages of the automotive GVC include vehicle design and development; parts,
component, module and sub-system production; and systems integration and final assembly.
Distribution, repair, and recycling are also significant parts of the industry, with large-scale
employment, but tend to be comprised mainly of local actors and are not included in the
analysis. Marketing and sales are most often handled by the lead firms and are not outsourced.
Figure 1 offers a simplified visual representation of the GVC.
Figure 1. The Automotive Global Value Chain
Vehicle Design & Systems !
Parts & Systems:! Replacement Parts
Development! Components!
Integration & ! Marketing & Sales!
Modules! & Recycling!
Final Assembly!
Electronic Final Products! Market Segments!
Vehicle ! Maintenance &
components! Interior System:!
development! Automobiles! Repair!
Seat, interior trim, Passenger!
Mechanical cockpit module!
System design! components! Trucks! Commercial!
Composite Recycling!
components! Body System: Skin, Buses! Industrial!
finish, trim, doors!
Wiring! Trailers! Technical training,
Buses!
and customer
Aluminum support!
Electrical & Motorcycles! Motorcycles!
components! Electronics System:!
Ignition, chassis
Rubber components! Electric Vehicles!
electronics, interior
electronics!
Software!
Chassis System:
Drive train, rolling
chassis, front and
rear end modules!
Source: Authors.
Vehicle Design and Development: Vehicle conceptual design is a mainly artistic process
that focuses on appearance and external features, though vehicle handling and aerodynamic
characteristics are also taken into consideration. It is generally carried out in-house in
automaker design styling studios, although independent design houses such as Italy’s Pininfarina
(recently purchased by India’s Mahindra) and Bertone regularly produce vehicle designs for
multiple automakers. Moving from concept to a drivable vehicle that can be massed produced
while also meeting private and public quality and safety standards has historically been a very
complex, difficult, and long-term process that is carried out in large, multi-disciplinary
engineering and test centers.
The heavy engineering work of vehicle development, where conceptual designs are translated
into the parts and sub-systems that can be produced by suppliers and assembled into a drivable
vehicle, remain centralized in or near the design clusters that have arisen near the headquarters
4The Philippines in the Automotive Global Value Chain
of lead firms (automakers).6 This process is led by automakers, but over the years has been
extended to include some collaboration among many of the largest suppliers.7 The increased
involvement of first-tier suppliers in design and purchasing of critical components has led to the
spatial co-location of supplier engineering facilities. This is especially true in North America,
where automakers have been the most aggressive in demanding that suppliers contribute to
design efforts. Because the Detroit, Michigan area has been a center of vehicle design and
engineering for nearly 100 years, the cluster has specialized labor markets, education and
training, and a host of other institutions that have arisen to support the field of automotive
engineering. As a result, the regional headquarters of foreign automakers and global suppliers—
typically the site of regional sales, program management, design, and engineering—have
gravitated to the greater Detroit area, even as parts manufacturing and final assembly have
become dispersed nationally, regionally, and globally (the southern US, Mexico, and China).8
Because vehicle programs take shape over several months or even years, and the largest lead
firms have dozens of programs in the pipeline at any point in time, getting involved in these
projects is difficult for suppliers without a presence in the cluster.
Parts and Components: The motor vehicle industry is a complex assembly sector with a
“tiered” supply chain structure. A single passenger vehicle is made from thousands of parts
produced by hundreds of suppliers. While this stage of the value chain involves SMEs that may
only serve domestic markets, general supplier consolidation in higher tiers has left space in the
supply chain for local suppliers and SMEs to access export markets in more generic parts. In
recent years, global and regional suppliers have expanded their reach, allowing them to work
for multiple lead firms or Tier I suppliers to alleviate capacity utilization concerns.
Systems/Module Manufacturing: Parts and components are used to build modules, which
describe physically interconnected system of parts such as front ends (bumpers, grills, lighting,
etc.), instrumentation or ‘cockpit’ clusters, or front or rear end suspension ‘cradles’ that
include dozens of suspension parts (springs, shock absorbers, tie rods, etc.). Modules then form
the basis of systems, which can be divided into four broad categories: interior (seat, trim, and
6
The principal automotive design centres in the world are in Detroit, US (GM, Ford, and Chrysler, and more
recently Toyota and Nissan); Cologne (Ford Europe), Rüsselsheim (Opel, GM’s European division), Wolfsburg
(Volkswagen), and Stuttgart, Germany (Daimler-Benz); Paris, France (Renault); and Tokyo (Nissan and Honda) and
Nagoya, Japan (Toyota). In general, design work in developing countries remains focused on adapting vehicles to
local market conditions.
7
As with vehicle design, a set of independent vehicle engineering consultancies have become more prominent in
recent years, such as Austria’s AVL, which specializes in powertrains (engine and transmission combinations),
Ricardo, and IAV, which offer a full range of services. Engineering and design functions have generally remained
rooted in traditional automotive manufacturing hubs in the USA, Germany, and Italy. For example, South Korea’s
Hyundai established an important design studio in Frankfurt, Germany, within the cluster historically dominated by
GM’s European division, Adam Opel.
8
For example, Toyota consolidated much of its North American design and R&D activities in Ann Arbor, Michigan
in 2005, even though its regional manufacturing headquarters are located in Kentucky. In 2006, Nissan moved its
North American headquarters from Los Angeles, California to the Nashville, Tennessee area. Nissan’s conceptual
design studio is in San Diego, California, but the eightfold larger engineering-oriented technology center is in
Farmington Hills, a Detroit suburb. As the international consolidation of the supply base has proceeded, suppliers
based in Europe and Asia, such as Yazaki (Japan), Bosch (Germany), Autoliv (Sweden), and many others (including
China’s Yengfeng Automotive, profiled below), have established major design centers in the Detroit region to
support their interactions with American, and increasingly, Japanese automakers.
5The Philippines in the Automotive Global Value Chain
cockpit module); body (doors, skin, finish, trim); electrical and electronic (ignition wiring,
chassis electronics, and interior electronics), and chassis (drive trains, radiators, front and rear
end modules).
Modules can sometimes be built up separately from the final assembly line, commonly in nearby
plants owned and operated by suppliers. These plants typically source components farther
afield—in cases where parts have a high enough value-to-weight ratio (electronics) or are labor
intensive and produced in lower cost locations (wire harnesses and seat covers), very far afield.
However, even this complex picture is too simple, since capital-intensive subsystems such as
engines and transmissions tend to be produced in a few centralized locations and shipped to
multiple final assembly plants.
Systems Integration & Final Assembly: Similar to commercial aircraft, final assembly of
motor vehicles is almost always undertaken by lead firms. This means that final assembly plants
are strategic assets meant for the sole use by the lead firm, rather than shared assets of
contract manufacturers producing for multiple brands. Furthermore, many production fixtures
for high volume assembly plants continue to be platform or even model-specific, and product
variety is typically limited to variations on vehicle colors and options, although innovations in
assembly techniques and equipment are gradually leading to increased assembly-line flexibility.
This pattern contributes to a common problem in the industry: low capacity utilization rates for
automakers and their suppliers. Markets (including exports) must be large enough for single
brands to support dedicated final assembly plants. Even parts production is sometimes
dedicated to a single automaker.
To solve this problem, automakers seeking to produce in small-market developing countries
have resorted to Complete Knock Down (CKD) production models to overcome tariff
barriers and meet local content requirements. With this approach, “kits” of parts are collected
from high-volume assembly plants, placed in shipping containers, and send to low volume final
assembly plants in small market countries.9 An alternative production method is the Completely
Built Up (CBU) model, which describes when motor vehicles are assembled in a centralized
location and then shipped final destinations where finishing touches such as bumpers or tires
are applied.
In CKD production, vehicles are assembled using labor-intensive techniques suitable to both
the prevailing labor costs and the lack of justification for investments in large scale automation
typically seen in high volume plants. CKD plants commonly produce as few as 5,000 units per
year. Typically, integrated production can begin when annual production volumes rise well
above 50,000 units. A fully scaled passenger vehicle assembly plant produces about 350,000
units per year.
As these figures suggest, there are a range of production models between “complete” knock
down kits and fully integrated production, and most small developing countries with automotive
industries exist somewhere along this continuum, working under constant regulatory pressure
9
For an extended discussion on CKD assembly, please see: Sturgeon, Timothy & Richard Florida. (2000).
“Globalization and Jobs in the Automotive Industry.” MIT IPC Globalization Working Paper 01-003.
6The Philippines in the Automotive Global Value Chain
for rising local content. But, given the economics of the industry, such targets usually go unmet,
forcing automakers to pay fines and high import duties, costs that are typically passed on to
consumers in the form of higher prices.
2.2. Global Supply and Demand in the Automotive GVC
The geographic organization of automotive GVC is complex and can be analyzed at three levels:
globally, regionally, and nationally. Global integration has proceeded the farthest at the level of
major automakers and their largest suppliers, which have global capacity across almost all
regions. Production tends to be organized regionally or nationally in large countries, with bulky,
heavy, and model-specific parts-production concentrated close to final assembly plants to
assure timely delivery and minimize transportation costs, and lighter, more generic parts
produced at a distance to take advantage of scale economies and low labor costs. When
product variety is high, parts for complex sub-assemblies such as seats and suspension cradles
are shipped from distant low-cost production locations to sub-assembly facilities adjacent to
final assembly plants, where they can be tailored to the exact requirements of vehicles under
assembly. Vehicle development is, again, concentrated in a few design centers as the largest
automakers have sought to distribute the high cost of vehicle design and engineering across
products sold in multiple end markets.
Because centrally designed vehicles are manufactured in multiple regions, buyer-supplier
relationships typically span multiple production regions. Automakers increasingly demand that
their largest suppliers have a global production presence as a precondition to being considered
for new parts. However, production arrangements also have persistent regional patterns (Lung
et al., 2004; Dicken, 2007). Because many automotive parts tend to be heavy and bulky, and
efforts to reduce inventory have driven firms to employ just-in-time delivery to reduce costs
and increase quality, there are limits on how far apart parts production and final assembly can
be. As a result, regional parts production tends to feed final assembly plants producing largely
for regional and national markets.
Within countries, automotive production and employment are typically clustered in one or a
few industrial regions. In some cases, these clusters specialize in specific aspects of the business,
such as vehicle design, final assembly, or the manufacture of parts that share a common
characteristic, such as electronic content or labor intensity. Because of deep investments in
capital equipment and skills, local automotive clusters tend to be very long-lived, which partially
explains why the automotive industry is so often the target of industrial promotion policies.
Many of these trends—the assembly of vehicles in final markets, the regional trade in systems
and sub-systems, and global trade in parts and components—are reinforced by international
trade flows. Table 1 shows that about 46% of the value of international trade was of parts and
components in 2014, up from about 41% in 2007. Bodies and drivetrain subassemblies, which
made up about 5% of trade in 2014, tend to be produced by the in-house manufacturing
facilities of automakers; from this, it can be estimated that final vehicles directly account for
about 49% of total exports.
7The Philippines in the Automotive Global Value Chain
Table 1. Global Automotive Exports by Value Chain Stage and Subsector
Share of Auto-Related CAGR
Value (US$, billions)
Value Chain Stage and World Trade (%) (%)
Sector 2007-
2007 2010 2012 2014 2007 2010 2012 2014
14
Total 1,159 1,104 1,296 1,399 0%
Components 474 495 591 637 41 45 46 46 3%
Of the Body system 193 201 240 262 17 18 19 19 4%
Of the Drive train 113 120 149 159 10 11 11 11 4%
Electrical systems 73 82 99 114 6 7 8 8 5%
Of the Body system or Drive
95 92 103 103 8 8 8 7 7%
train
Subassemblies 69 59 69 74 6 5 5 5 1%
Body system 3 3 4 3 0 0 0 0 1%
Drive train 65 56 64 70 6 5 5 5 0%
Final Products (Passenger
616 550 636 688 53 50 49 49 1%
Vehicles)
Source: UN Comtrade, HS02 6D codes, reporters exports to the world. Retrieved on October 28, 2015.
Global Demand
Vehicle demand in the motor vehicle industry is growing the fastest in large developing
countries. China (23.4 million vehicle sales or registrations in 2014), the US (16.8 million), and
Japan (5.5 million) are the world’s largest markets for the 88.2 million vehicles sold in 2014.
Market growth in newly industrialized, transition, or developing countries has been especially
strong, with China (15.1%), Indonesia (8.5%), India (8.2%), and Brazil (7.4%) displaying the
highest growth rates while nations such as Germany (minus 0.7%), Japan (minus 0.5%), and the
US (minus 0.4%) seeing a reduction in demand. That trend that is likely to continue as
purchasing power increases in emerging markets along with the growth in the middle class,
despite strong post-crisis recovery of the market in the US.
Vehicle sales tend to be sensitive to short-term economic cycles because they can be delayed in
hard economic times. For evidence of this, see new vehicle registration figures for the US,
Japan, and the UK at the nadir of the financial crisis in 2009. This was offset in some European
countries such as Germany, France, and Italy by aggressive incentives provided by governments
keen on “bailing out” local producers through programs as varied as “cash for clunkers” type
incentives and outright government loans (Sturgeon & Van Biesebroeck, 2009).
Global Supply
Automakers tend to build where they sell. Because market saturation means that auto sales are
generally sluggish in home markets of the “Triad” region (North America, Europe, and Japan),
and because of the aforementioned political, regulatory, and operational pressure to
manufacture motor vehicles within or near markets where they are sold, production now takes
place in more locations than it did 30 years ago, with automotive manufacturers and their global
suppliers having made substantial investments in the world’s largest and most dynamic emerging
economies.
8The Philippines in the Automotive Global Value Chain
China became the largest consumer and producer of motor vehicles in 2010. In 2014, more
than 23 million vehicles were sold in China, according to the OICA (Table 2 lists all countries
that manufactured more than 1 million vehicles in 2014). The country’s huge and rapidly
growing market is mainly supplied by the local production of foreign joint ventures, most
prominently with Volkswagen (with SAIC) and General Motors (with FAW). India has similar
characteristics, but growth has been more modest. It is also dominated by foreign brands,
despite the success of a few local companies (mainly Tata and Maruti).
Table 2. Global Leaders in Motor Vehicle Production, 2013-2014
Units Produced (thousands)
Country % Change
2013 2014
China 22,037 23,661 6.9%
USA 17,262 18,489 6.6%
Japan 9,891 10,043 1.5%
Germany 5,996 6,211 3.5%
South Korea 4,712 4,700 -0.3%
Mexico 4,049 4,470 9.4%
India 4,187 4,024 -4.0%
Canada 3,774 3,850 2.0%
Brazil 4,247 3,631 -17.0%
Thailand 3,758 2,986 -25.9%
Spain 2,524 2,852 11.5%
France 2,022 2,143 5.7%
Russia 2,264 1,935 -17.0%
United Kingdom 1,647 1,638 -0.5%
Turkey 1,530 1,524 -0.4%
Indonesia 1,205 1,325 9.1%
Czech Republic 1,128 1,246 9.5%
Iran 840 1,223 31.3%
Source: OICA, 2015.
Foreign investment is also strong and production growing in lower cost countries that are
proximate to the heartland of the automotive industry (the US and Europe). For low cost
passenger vehicles, in particular, countries “peripheral” to the largest established markets have
become attractive places to locate final assembly. This helps to explain why countries such as
Mexico, Thailand, Turkey, and the Czech Republic have increased their volume of total vehicle
production.
2.3. Firms and Governance Structures in the Automotive GVC
The automotive GVC is dominated by a small handful of large, powerful lead firms that use
their size and technological prowess to exert control over upstream actors. These companies
operate, in large part, within their own “world” of standards and dictate the characteristics of
parts and subsystems as well as the location of suppliers’ production, at least to a degree.
Globally, there were 19 companies that generated at least 1 million units in 2014. Table 3
provides a list of these firms.
9The Philippines in the Automotive Global Value Chain
Table 3. Motor Vehicle Companies that Eclipsed 1 Million Unit Threshold, 2014
Units Produced
Rank Company Country Share
(thousands)
1. Toyota Japan 10,475 11.5%
2. Volkswagen Germany 9,894 10.9%
3. General Motors USA 9,609 10.6%
4. Hyundai South Korea 8,008 8.8%
5. Ford USA 5,969 6.6%
6. Nissan Japan 5,097 5.6%
7. Fiat Italy 4,865 5.4%
8. Honda Japan 4,513 5.0%
9. Suzuki Japan 3,016 3.3%
10. Peugeot France 2,917 3.2%
11. Renault France 2,761 3.0%
12. BMW Germany 2,165 2.4%
13. SAIC China 2,087 2.3%
14. Daimler Germany 1,973 2.2%
15. Changan China 1,447 1.6%
16. Mazda Japan 1,328 1.5%
17. Dongfeng China 1,301 1.4%
18. Mitsubishi Japan 1,262 1.4%
19. BAIC China 1,115 1.2%
Total from companies manufacturing more than 1m units 79,813 87.9%
Global total 90,717 100%
Source: OICA, 2014.
Within Table 3, there are only eight truly large producers, manufacturing more than 4.5 million
units. Of these eight, only one (Hyundai) is headquartered in a country without significant
motor vehicle production prior to 1970. However, China now has many smaller producers that
as a group, now account for 12.5% of world production. Significantly, a few of Chinese firms
specialize in the production of electric vehicles, such as the motor vehicle division of BYD, a
large producer of batteries headquartered in the heart of China’s largest electronic
manufacturing cluster in Shenzhen, Guangdong Province.
There are a number of key features of how these lead firms interact with suppliers and how
power is distributed. Some of the most relevant are outlined below.
The largest lead firms have rationalized their supply base around a smaller number
of increasingly large global suppliers. There has been a dramatic consolidation at the Tier
1 level since the 1990s, and as of 2014, there were 56 automotive suppliers with more than
US$4 billion in sales into final assembly. Table 4 lists the largest 15. Many of these suppliers
such as Robert Bosch, Magna, and Magneti Marelli provide a wide variety of complex systems,
while others—Denso and Mando—are more specialized and a few focus on a specific item,
such as Goodyear, which produces tires.
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